China Mobile (941 HK) – Looking through the earnings miss
• Acceleration in DICT revenue growth in 1QFY2022; EBITDA margin drops 1.3ppts
• Still guiding for favourable growth in service revenue and net profit for 2022
• FV of HKD63
Bottom-line below expectations – China Mobile’s (CM; 941 HK) 1QFY2022 results were broadly in-line with expectations. Mobile service revenue grew by an estimated 2.7% YoY to RMB137.2b, with blended ARPU increasing by 0.2% YoY to RMB47.5. While CM registered healthy mobile net adds during the quarter (+10k), we believe that lockdowns in certain Chinese cities in March did contribute to a reduction in demand for mobile services. CM’s fixed-line service revenue grew by an estimated 28.4% YoY to RMB56.5b, which we attribute mainly to the 50.9% YoY growth in data, information and communications technology (DICT) revenue as well as robust broadband revenue growth (estimated at +17% YoY) in light of CM’s efforts to increase the proportion of its gigabit broadband business, enhance penetration of its digital set-up box (Mobaihe) and explore new and innovative smart home applications. We note that EBITDA margin (on service revenue) at 39.3% was a drop of 1.3ppts YoY, which we believe stems mainly from higher network and staff costs. All considered, net profit grew 6.5% to RMB25.6b, or ~6% below consensus.
FV of HKD63 – CM continues to guide for favourable growth this year in both service revenue and net profit. The group is also looking to achieve stable and healthy growth mobile ARPU for 2022. As a recap, CM has guided for an increase in the payout ratio from 60% in 2021 to at least 70% by 2023. In terms of CAPEX, CM has previously projected a slight increase of CAPEX (+0.9% YoY) for 2022, despite increased investments to expand IDC and cloud networks under China’s Eastern Data Western Computing strategy. We continue to expect a benign regulatory environment for operators, while growth momentum in the group’s DICT business is expected to remain robust. Still, we expect margin pressure to remain as the 5G
network expands and investment demand is likely to continue so as to support the development of the group’s DICT business. Valuations remain undemanding and we remain constructive on the name, as CM is likely to be a relatively defensive pick in the midst of market volatility. Following adjustments to our estimates (which maintaining our ESG discount of 10%), our FV eases slightly from HKD63.90 to HKD63.00.
ESG updates
We note that CM ESG rating has been downgraded in Jun 21. We understand that methodology enhancements to the Corporate Behavior Theme resulted in a greater emphasis on business ethics practices and exposure to risks related to corruption. While evidence suggests CM maintains robust policies and oversight related to ethical business conduct, it has faced varied allegations ranging from involvement in surveillance activities to anti-competitive practices; these may pose risk of penalties or reputational damage. BUY. (Research Team)